How Does the Concept of ‘Impermanent Loss’ Relate to DeFi Staking Rewards?

Impermanent Loss (IL) is the temporary loss of funds a liquidity provider experiences when the price of their deposited assets changes compared to simply holding them in their wallet. It is an opportunity cost, not a realized loss until withdrawal.

IL is a key risk that must be offset by the DeFi staking rewards (yield and fees). If the rewards are not high enough to compensate for the potential IL, the net yield is negative, reducing the incentive to stake and thus the token's intrinsic value.